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A 5-year TIPS auction is coming up on April 21, 2011. The announcement is scheduled on April 14. This upcoming auction will be the first time when a new coupon rate policy takes effect.

Under the new auction schedule implemented since January 2011, there will be a TIPS auction every month. In the odd-number months (January, March, ...), US Treasury will sell the 10-year TIPS. They will sell 5-year TIPS every four months in April, August, and December. 30-year TIPS are also auctioned every four months in February, June, and October.

Under the previous coupon rate policy, the coupon rate on new issues is set to the nearest 0.125% below the auction result, with a floor of 0%. The new policy raises the minimum coupon rate to 0.125%.

Because the market yield for 5-year TIPS is currently below zero, it's almost certain the auction result will be negative. In that case the coupon will be set to 0.125% and the price will be adjusted to above 100. For every $1,000 face value bond, you will pay more than $1,000.

Yes, you are guaranteed to lose money to inflation if you buy this 5-year TIPS and hold them to maturity. However, with 5-year nominal Treasury yield at 2.2% as I write this, I expect the investors will lose money to inflation in the 5-year nominal Treasury notes as well if they hold them to maturity. Which will make investors lose more is the question.